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Yes, Virginia, that is how PILOT's work......

When a savvy real estate developer like Jamie Herring of Herring Properties, the contract purchaser for sites owned by Princeton Theological Seminary (PTS), in the recent public meeting says he didn’t know that none of the revenue from a PILOT (payment in lieu of taxes) goes to support the school system, I was shocked. But then I thought, “Gosh, if a real estate developer doesn’t understand a PILOT, then maybe others don’t either.”

So here is the PILOT primer.

Towns enter into PILOT agreements with developers when there is a need to create a public-private partnership that will encourage the development or redevelopment of a property or properties that might otherwise languish – or worse, cause actual, demonstrable harm. The PILOT agreement is an incentive to invest.

Developers love PILOT payments because the agreement always results in the developer paying far less than they would have paid in taxes. That agreement reduces a future obligation of the developer and increases the rate of return on a project.

Think profit.

And the reason towns love it, well, it is a bit more complicated. It is true that the town may advance a much-desired project, and it is also true that the town collects MORE than they would have collected in taxes.

Wait, wut?

In Princeton, the town collects the total tax obligation of taxpayers on behalf of three entities – the town, the schools, and the county. The recent “2023 Princeton’s Budget Newsletter” states that the municipal share of the tax obligation is 22 percent this year. The Mercer County portion, including the County Open Space tax is 29 percent, and the Princeton Public Schools receive 49 percent.

In New Jersey, when a municipality enters into a PILOT agreement with a developer, they still collect the entire obligation, but now they are collecting it for themselves. The County must receive a scant 5 percent, a fraction of what they would have collected in taxes. Towns aren’t allowed to cut out the county completely. But guess who does get cut out? The schools!

The municipality keeps the other 95 percent of the revenue, which can be far more than the municipality’s share had the developer paid taxes. Now towns will argue that this is money that can support infrastructure projects and things like the additional need for police and fire protection that may be created by the development.

But with residential projects, you can be sure that they will underestimate one thing – the number of school children who will attend the public schools.

You would be surprised to learn that according to developers, there isn’t any type of multi-family housing that houses school-age children. (Only young professionals and childless couples who WFH and ride bikes everywhere live in these units.) Elected officials steadfastly adhere to the mantra that they cannot consider the number of school-age children in planning and zoning.

What about the money the school would have received if taxes were levied?

The town explains it this way: “Each year the school district receives 100% of its budget (with annual increases capped at 2%) through traditional taxation. Changes in municipal receipts to the positive or negative do not affect the school budget. The Board of Education is guaranteed its budget regardless of what the municipality collects and can only increase by 2% under the state law.”

That is true; the school budget is fixed once it is approved. But not the whole story. The schools will get their much-needed money no matter the amount. But how? And from whom?

Assume that the developer is actually paying $1 million in taxes – not a PILOT. For the sake of easy argument, roughly $500,000 would go to the schools to support their budget. That is $500,000 that is not being paid by other taxpayers.

Or, said another way, if schools need to raise X amount in taxes to support their budget, all Princeton taxpayers pay their fair share, determined by property value, to meet the budget. When a large landowner/developer is exempted from paying their fair share, then that burden is borne by each and every taxpayer. So, in the above example, when the developer doesn’t pay their fair share, or $500,000, then we all chip in to cover them. Schools are good; taxpayers not so much.

Recently we were told that the town is negotiating with the School Board to share some of the PILOT revenues. The School Board member with whom I spoke denied it. But true or not, that is a terrible system. We should not have our independently elected School Board beholden to the elected officials for funding. It is a slippery slope until the elected officials are weighing in on which projects should be funded or which expenses are reasonable.

For the sake of transparency and accountability, these two duly elected bodies should stay in their lanes.

In spite of some recent misguided decisions to the contrary, it is hard to argue that Princeton has blighted property that requires a PILOT to encourage redevelopment. Even Avalon Princeton at the old hospital site, an environmental challenge, didn’t receive a PILOT to redevelop. They pay taxes on that site, including school taxes. All of Princeton is pretty ripe for redevelopment, and it doesn’t seem we can accurately predict how many school children will live in our new multi-family dwellings.

That’s fine – as long as we ask the developers to pay their fair share of school taxes.

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